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Licensing VS Franchising

In a typical licensing agreement, the licensor grants the licensee the right to sell goods, apply a brand name or trademark, or use patented technology owned by the licensor, in exchange for payments to the licensor paid by the licensee for use of such right.

In a franchising agreement, the franchisor also offers know-how and access to a business system in addition to branding and products offered by the franchisor

Our clients often approach us with licensing in mind and we offer the following comparison between franchising and licensing:

Licence

Franchise

Operational Control

A Licensor usually has little to no operational control as to how a licensee markets and distributes or utilises the licensed product

A franchisor usually has tighter operational controls and prescribes (with the use of an operations manual) how a franchisee operates their franchised business

Training and Support

Training and support is usually limited to product knowledge.

Franchisor offers extensive training on operating of the business as a whole. Ongoing support is also offered and usually takes the form of a monthly visit from a franchisor representative.

Fees

Ongoing license fee usually payable

Initial and ongoing franchise fees payable:

Upfront franchise fee

Monthly management service fees

National marketing fund contribution on monthly basis

The Consumer Protection Act applies to franchising and, although it remains to be tested, may well apply to licensing arrangements as well, if licensing agreements meet the definition of a franchise agreement as per the CPA.

The Consumer Protection Act defines a franchise agreement as follows:

‘‘franchise agreement’’ means an agreement between two parties, being the franchisor and franchisee, respectively—

in which, for consideration paid, or to be paid, by the franchisee to the franchisor, the franchisor grants the franchisee the right to carry on business within all or a specific part of the Republic under a system or marketing plan substantially determined or controlled by the franchisor or an associate of the franchisor;

under which the operation of the business of the franchisee will be substantially or materially associated with advertising schemes or programmes or one or more trademarks, commercial symbols or logos or any similar marketing, branding, labelling or devices, or any combination of such schemes, programmes or devices that are conducted, owned, used or licensed by the franchisor or an associate of the franchisor; and

that governs the business relationship between the franchisor and the franchisee, including the relationship between them with respect to the goods or services to be supplied to the franchisee

As can be seen from the above two descriptions, a licence agreement may well fall under the definition of a franchise agreement as it contains the following similar elements:

Consideration is paid for the right to carry on the business under a system or marketing plan determined by the franchisor

The licensee’s business may well be associated with the licensor’s licensed product, marketing schemes, trademarks, logos, brand name

the licence agreement usually governs the business relationship between the licensee and licensor, including the relationship of goods supplied to te licensee by the licensor.

What this may mean for licensors is that their agreements and business processes may need to be compliant with the Consumer Protection Act. Also, businesses who want to avoid compliance to the CPA by terming their agreement a license agreement could end up having to comply with the CPA anyway. Franchising Plus encourages business format franchising where applicable, as it provides most benefits to a franchisee and franchisor by ensuring the replication of a business system, rather than a brand or a product only.

If you want to discuss your expansion options in terms of licensing or franchising, contact us